Friday, November 06, 2009

On Elinor Ostrom

The choice of Elinor Ostrom as a co-recipient of the 2009 Nobel Prize in Economics has taken many, if not most, economists by surprise. The annual betting pool at Harvard did not receive a single entry for Ostrom, so half the winnings were shared by those who predicted that there would be no correct guess. On his widely read blog, Steve Levitt reacted as follows:

If you had done a poll of academic economists yesterday and asked who Elinor Ostrom was, or what she worked on, I doubt that more than one in five economists could have given you an answer. I personally would have failed the test… the economics profession is going to hate the prize going to Ostrom even more than Republicans hated the Peace prize going to Obama.

I, for one, am thrilled at the choice. Ostrom’s extensive research on local governance has shattered the myth of inevitability surrounding the “tragedy of the commons” and curtailed the uncritical application of the free-rider hypothesis to collective action problems. Prior to her work it was widely believed that scarce natural resources such as forests and fisheries would be wastefully used and degraded or exhausted under common ownership, and therefore had to be either state owned or held as private property in order to be efficiently managed. Ostrom demonstrated that self-governance was possible when a group of users had collective rights to the resource, including the right to exclude outsiders, and the capacity to enforce rules and norms through a system of decentralized monitoring and sanctions. This is clearly a finding of considerable practical significance.

As importantly, the award recognized an approach to research that is practically extinct in contemporary economics. Ostrom developed her ideas by reading and generalizing from a vast number of case studies of forests, fisheries, groundwater basins, irrigation systems, and pastures. Her work is rich in institutional detail and interdisciplinary to the core. She used game theoretic models and laboratory experiments to refine her ideas, but historical and institutional analysis was central to this effort. She deviated from standard economic assumptions about rationality and self-interest when she felt that such assumptions were at variance with observed behavior, and did so long before behavioral economics was in fashion.

The decision by the Nobel Committee to recognize and reward work that is so methodologically eclectic and interdisciplinary might be viewed as a signal to the profession that it is insufficiently tolerant of heterogeneity and dissent. This is a particularly salient criticism in light of the recent financial crisis and the severity of the accompanying economic contraction. Could it not be argued that economists would have been less surprised by the events of the past couple of years, and better able to contain the damage, had there been more methodological pluralism and less reliance on canonical models in the training of economists at our leading universities?

It may be countered that economics has indeed imported many methods and ideas from other disciplines. Behavioral finance and experimental economics are both areas of intensely active research, and work in these fields is routinely published in top journals. However, even such interdisciplinary cross-fertilization has something of a faddish character to it, with excessively high expectations of what it can accomplish. Behavioral economics, for instance, has been very successful in identifying the value of commitment devices in household savings decisions, and accounting for certain anomalies in asset price behavior. But regularities identified in controlled laboratory experiments with standard subject pools have limited application to environments in which the distribution of behavioral propensities is both endogenous and psychologically rare. This is the case in financial markets, which are subject to selection at a number of levels. Those who enter the profession are unlikely to be psychologically typical, and market conditions determine which behavioral propensities survive and thrive at any point in historical time.

Hence it could be argued that the recognition of Ostrom’s work this year was not just appropriate but also wise. There is no doubt that her research has dramatically transformed our thinking about the feasibility and efficiency of common property regimes. In addition, it serves as a reminder that her eclectic and interdisciplinary approach to social science can be enormously fruitful. In making this selection at this time, it is conceivable that the Nobel Committee is sending a message that methodological pluralism is something our discipline would do well to restore, preserve and foster.